Ownership concentration and equity transactions: The ambivalent role of controlling shareholders in firm performance in Latin American contexts

This study aims to test a corporate governance mechanism described by Jensen and Meckling in their classic theory of the agency costs of outside equity, focusing on Latin American companies characterized by controlling shareholders who own a large percentage of their firms' shares. Our findings align with the theory: Ownership concentration gives controlling shareholders significant influence over their firms, enabling them to reduce agency costs when selling shares or issuing new equity, as their interests align with those of outside shareholders. Higher market valuations and better investment performance evidence this. However, we also find that this influence allows controlling shareholders to act opportunistically when increasing their ownership stakes or during stock repurchases, as interests are not aligned, leading to adverse effects on firm performance. Thus, high ownership stakes provide controlling shareholders with influence, but whether this influence positively or negatively impacts performance depends on the specific context of equity transactions. This paper sheds new light on the ambivalent role of ownership concentration, offering insights relevant to improving monitoring and regulation in markets with weak institutions.